What are correspondent banks and why are they important to us in Jamaica and the Caribbean?

Correspondent banks provide the Caribbean with vital access to the international financial system.
Simply, correspondent banks, which are mainly large banks in the United States and Europe, provide services to usually smaller, domestic banks and financial institutions located in developing regions of the world, such as the Caribbean and Latin America.

The arrangements with correspondent banks are essential for people and businesses to complete international payments. They facilitate the movement of funds across borders, and provide access to foreign currencies and foreign financial systems so that we can, for example:

  • * Make purchases online using our credit cards or debit cards
  • * Wire funds from banks overseas; or
  • * Purchase goods and raw material from overseas for our businesses

In a correspondent banking relationship, the correspondent bank provides the respondent bank (smaller, domestic, local bank or financial institution) with a deposit account or other liability accounts and services. The products and services most frequently used by financial institutions in the Caribbean include:

  • * Cheque clearing
  • * Clearing and settlement
  • * Cash management services
  • * International wire transfers
  • * Financing for trade

The financial services sector plays an important role in facilitating trade, commerce and investment in the Caribbean, across our region and with the wider global community. For the Caribbean, the sector is the second largest contributor to Gross Domestic Product (GDP), or what we earn from producing, after tourism.
The growth of our economies in the region and continued inflows of remittances depend heavily on access to the international financial system through correspondent banking services. Therefore, if trade is restricted due to the withdrawal of correspondent banking services, then the economies of Jamaica and the Caribbean will be severely impacted.

Why are correspondent banks withdrawing from the Region and when did the problems begin?

After the 2008/09 Global Financial Crisis, international banks reviewed their business models because of significant changes in the regulatory and enforcement framework in the global financial sector. In order to lower their risks, many global banks adopted a range of approaches. These tactics are largely known as de-risking strategies. Correspondent banks perceived that respondent banks placed their operations at a higher than acceptable level of risk and took steps to limit the impact on their operations. For example, they have been concerned about institutions that conduct business or own operations that include riskier customers, such as money transfer businesses and politically exposed persons.

Some of the de-risking strategies correspondent banks have used have included:
* Termination of correspondent banking relationships (CBRs) with local banks
* Strategic market re-positioning
* Withdrawal from selected markets
* Closure of accounts of selected clients and classes of clients
* Relocation of business

What are the drivers of de-risking?

The drivers of de-risking are complex and the significance of each driver vary across countries in our region.

They include:
* Concerns about the inclusion of higher-risk categories of customers (e.g. Money or Value Transfer Services, cash intensive firms, specialised professionals, and politically exposed persons) in respondent banks’ customer base;
* Know Your Customer’s Customer requirements (KYCC);
* concerns about the higher risks associated with the presence of offshore sectors in some of these countries or jurisdictions with concerns about supervision and legal frameworks; and
* Increasing costs of compliance;
* Uncertainty in cross border and local regulatory environments;
* Changes in risk appetite; and
* Perceived lack of profitability of certain correspondent banking services.

How widespread is the problem of de-risking across the Caribbean?

Approximately 24 foreign banks which are largely located in the USA, Canada, Europe and the Caribbean, have provided services to Jamaica and the region.

In July 2016, the International Monetary Fund raised alarm about de-risking in the Caribbean at a meeting with the Federal Reserve Bank of New York. At least 16 banks in five Caribbean countries have lost all or some of their correspondent banking relationships as of May 2016.

The de-risking of correspondent banking services in the Caribbean has occurred without any evidence of weaknesses in AML/CFT systems and programmes in the region.

Several financial institutions in Barbados, The Bahamas, the Eastern Caribbean, Guyana, Haiti, Jamaica and Trinidad and Tobago have had their correspondent banking relationships terminated.

Impact of De-Risking
Jamaica - Correspondent banks in the United States, United Kingdom and Canada have terminated relationships or imposed restrictions. A leading local bank no longer accepts foreign instruments and remittances from Money Service Businesses (cambios)

Cayman Islands and the Turks and Caicos Islands - Lost their cash intensive businesses (money transfers)

The Bahamas - 2 domestic commercial banks and 4 international banks have had their CBR relationships terminated or restricted Various business lines negatively impacted including credit card payments, cash management, investment services, clearing and settlement, international wire transfers Lost their cash intensive businesses (money transfers) Cost of outgoing remittances (e.g. to Haiti) has increased

Belize - 5 out of 7 entities, including the largest domestic bank, lost their CBRs. Central Bank has had to assist with foreign payments and itself recently lost two of their correspondent banking relationships

Eastern Caribbean including Barbados - Canadian banks operating in the region have come under strict regulatory supervision and controls by the Canadian Office of Supervision of Financial Institutions (OSFI) regarding the application of KYCC procedures

Barbados - 8 domestic financial institutions have had their CBRs terminated by primarily Canadian and United States correspondent banks as well as a few in the Netherlands, United Kingdom and Germany

Guyana - Foreign correspondent transactions have fallen by 27% Trinidad and Tobago Several entities have become ‘unbanked’ in the last 24 months

Are there specific types of financial institutions being affected and why?

Money transfer operators and medium domestic banks and small and medium exporters have been the most affected institutions.

According to surveys published by the World Bank, more than 69 per cent of money transfer businesses have been affected, followed by small and medium domestic banks (44 per cent) and small and medium exporters (26 per cent). Domestic Caribbean banks, particularly those with trusted and long-standing strong Diaspora linkages, such as Jamaica National, now face considerable risks to their operations.

Because of the important role of remittances to Jamaica and the Caribbean, the threat to these trusted institutions represents a real threat to our countries.